Punitive Damages and the Law of Unintended Consequences

This has nothing whatsoever to do with the AmLaw 100 and their kin, but it's such a juicy example of the Law of Unintended Consequences that I have to call your attention to it.

Most readers of this blog have probably heard that California Governor Arnold Schwarzenegger's budget proposal calls for the state to take 75% of punitive damage awards, on the stated ground (putting the state's desperate need for revenue to one side) that since the purpose of "exemplary" damages is to make a punitive statement about the defendant's egregious misconduct, the goal is achieved even if the individual plaintiff does not collect in full.  Surprisingly, according to Columbia Law School Associate Professor Catherine Sharkey, eight states already have "split-recovery" statutes.  But consider their possible second-order effects:

• After a punitive damages award, but before appeal, the parties will have an almost overwhelming incentive to settle for $X where: X > [(Compensatory Award) + 25%(Punitive Award)] discounted by (odds of overturning the award on appeal).  By settling at a level that essentially guarantees the plaintiff what they would net after the state's take, and by characterizing the settlement as fully compensatory in nature, Pareto-optimality is achieved as between the parties.  (Glossary detour:  A "Pareto-optimal" outcome is one where every party is at least equally well off as before, and at least one party is better off—here, the plaintiff is equally well off and the defendant is far better off because they only shell out 25% of the punitives instead of 100%.)
• As well, since judges and juries will know about the state's take going in, might not this cause punitive awards to grow rather than diminish?
• Or consider the altered landscape for contingency-fee agreements:  Will the plaintiffs' firms be willing to stick with one-third of one-quarter of what they used to get?  Will the firms interpret (or re-word) their agreements to call for complete confiscation of the punitive amount since the client wouldn't be seeing anything until 33 cents had been received, and now the payment maxes out at 25 cents?

You get the idea.  Odds of this being enacted?  Beats me.  Odds of its having the intended effect?  Vanishingly small.